* An in-depth dive into likely near-term milk trends and their implications
Longstanding readers of our research (if there are any) may recall our historical obsession with
matters of a lactose nature. Coupling this with a precipitous collapse in milk price indicators, in this
note we take an in-depth dive into milk price trends and the implications for Danone.
* FY14: Emmanuel Faber should take the opportunity to rebase margins
Our analysis shows that relief in H214 input costs (we estimate liquid prices will decline 7%
sequentially and powder prices by 6%) will not be sufficient to deliver FY margins. Guidance can
only be delivered via further pricing actions and A&P declines. Neither are in the long-term
interests of the business. The forthcoming new CEO (not in place until 01st Oct), Emmanuel Faber,
should not miss the opportunity to rebase (we suggest lowering the FY14 LFL margin guidance to
–70bp from +/-20bp). Further, rebasing would provide much needed evidence of his independence.
* FY15: Milk deflation should boost margins, but will drag the top-line
Conversely, as milk deflation takes hold in FY15 (we estimate liquid at –10% YOY and powder at –
16% YOY) we envisage material margin expansion (+50bp). There are however two issues: (i)
consensus already anticipates this & (ii) we believe that the entire yoghurt category (at least in the
developed world) will likely be plunged into material top-line deflation…
* FY15: Danone will be the slowest growing food stock
As a consequence of yoghurt category deflation, we believe that Danone will struggle to generate
positive LFL sales growth in Dairy in FY15 (we look for flat) which leaves us with FY15e group LFL
sales growth of only 4.0% (cf. Nestle at 5.5% and Unilever at +5.1%).
* Conclusion: content to stay Underperform
While we concede that a FY14 warning is arguably somewhat anticipated, we believe not wholly
so. Furthermore, wrt. FY15, we believe the market has focused on the bottom-line implications of
milk, but missed the top-line impact. The slowest growing food stock is no grounds for a re-rating.